Question

Harris Company's fixed overhead costs are $4 per unit, and its variable overhead costs are $8 per unit. In the first month of operations, 50,000 units are produced, and 46,000 units are sold. Write a short memo to the chief financial officer explaining which costing approach will produce the higher income and what the difference will be. *Include caluculations to support claims/statements made in said letter*

Answer 1

	Note:
	To,
	Chief financial officer,
	Dear Sir,
	Please find below the calculation of the costing under two methods , if we go under variable costing method
	than the our cost of sales will be more and less profit and if we go for absorption costing than the out cost
	will be low and revenue will be more.There is difference of Profit is(568,000 - 552,000) = $ 16,000
	CALCUALTION OF cost of production units by using absorption and variable Costing
	Opening stock	0
	Unit Produced =	50000
	Unit Sold =	46000
	Closing Stock =	4000
		Year 1
	Caclualtion of recovery rate of Fixed Expenses =
	Fixed Expesnes =($ 4 X 50,000 units) =	$                     200,000
	Particulars	Absorption Costing	Variable Costing
	Variable Overhead Cost =	$                            8.00	$                            8.00
	Fixed Manufacturing Overhead	$                            4.00	$                                 -
	Cost of Production per unit	$                          12.00	$                            8.00
	Cost of production under Absorption costing =
	Production of 46,000 units = 46,000 units X $ 12 =	$               552,000.00
	Cost of production under Variable costing =
	Production of 46,000 units = 46,000 units X $ 8 =	$               368,000.00
	Add: Fixed Overhead =	$               200,000.00
	Total Cost	$               568,000.00